The Quantification of Operational Risk

38 Pages Posted: 30 Dec 2003

See all articles by Markus Leippold

Markus Leippold

University of Zurich; Swiss Finance Institute

Paolo Vanini

University of Basel

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003


We examine the quantification of operational risk for banks. We adopt a financial economics approach and interpret operational risk management as a means of optimizing the profitability of an institution along its value chain. We start by defining operational risk and then propose a framework to model risk mitigation through the bank's value chain over time. Using analytical and numerical methods, we obtain answers concerning capital allocation, network stability, risk figures, and diversification issues. Interpreting the results shows that the usual intuition gained from market and credit risk does not apply to the quantification of operational risk.

Keywords: Operational Risk Management, Stochastic Systems, Diversification, Profitability

JEL Classification: C19, C69, G18, G21

Suggested Citation

Leippold, Markus and Vanini, Paolo, The Quantification of Operational Risk (November 2003). Available at SSRN: or

Markus Leippold (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Paolo Vanini

University of Basel ( email )

Petersplatz 1
Basel, CH-4003

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